Deal of the century: Dell AND the Dell/Icahn Saga

Michael Dell and the private equity firm Silver Lake increased their offer to take the computer company Dell private in a leveraged buyout not because they think the company is necessarily worth more, but because they want a change in the rules under which shareholders will vote on the transaction.

According to sources familiar with the situation, the new offer of $13.75 for all outstanding shares of the company, or 10 cents higher than the previous offer, amounts to only a minimal increase that adds about $150 million to the pot, and values the company at about $26.6 billion.

People familiar with the thinking behind the increase say the issue is not money, but the rules that the special committee of Dell’s board overseeing the go-private process created at the start of the process. Under those rules, a shareholder who doesn’t vote is the equivalent of a shareholder who votes against the transaction. The new offer is contingent upon those rules being thrown out.

When the first votes were tallied last week, un-voted shares amounted to about 27 percent of the total, or about double 12 to 15 percent usually seen in situations like this. As one source close to the situation put it, there’s a good chance that a majority of shareholders who favor the deal could outnumber those who actively vote against it.

But the scales could be tipped by the large number of shareholders who haven’t voted and are for various reasons unlikely to vote. That would ultimately derail the transaction entirely.

“The presumption that these shares should be treated as if they had voted against the transaction is patently unfair,” Michael Dell and Silver Lake said in a joint statement. (Read it in full below.)

That block of non-voting entities and individuals amounts to about 405 million shares and breaks down into four groups according to people who have studied the situation.

As one source who requested anonymity put it: “It’s a great big number and frankly no one modeled accurately.”

One group is shareholders who owned the shares before the current record date of June 3, but who have sold them and therefore no longer have an interest in the outcome of the buyout battle.

A second group is institutional shareholders like sovereign wealth funds that have a policy of simply not participating in proxy votes of the companies in which they invest.

A third tier is comprised of shares held by banks and brokerage accounts on behalf of wealthy individuals who have a policy of not voting in proxy contests.

The last and probably the biggest block amounting to about 10 percent of shares outstanding, are ordinary retail investors, who may choose not to vote, or may not even know that the opportunity to vote exists.

Dell and Silver Lake have asked the special committee to change the voting rules to declare non-voting shareholders as uncounted votes, not “no” votes. The new proposed rules would count only votes of those shareholders who definitively vote one way or the other.

The special committee is to be amenable to the rule change, but wants a higher bid of about $14, according a report from Bloomberg News.

According to a personal familiar with the history and tone of the negotiations, Dell’s special committee insisted on the voting rules in order to improve the “optics” of the situation. It wanted to appear to be going the extra mile and beyond in order to preserve its neutrality

There are no provisions under Delaware law or in any other jurisdiction that requires non-votes to be counted as no votes in a proxy election. The Michael Dell/Silver Lake group opposed the rule during the negotiation process, but members of the special committee led by Dell director Alex Mandl, insisted, and in the end it stuck.

No one in the investor group thought the fate of the entire transaction, which would be the largest private equity transaction since 2009, would hang on this rule. It may end up bringing the entire process to a screeching halt. If that happens, the prospect of an extended fight for control of the company and significant drop in the company’s share price is very real.

Here’s the Dell-Silver Lake statement.

Statement of Michael Dell and Silver Lake

July 24, 2013 – Michael Dell and Silver Lake Partners released the following statement today:

Under current provisions, shares that don’t vote are counted as votes against the transaction for purposes of determining whether a majority of the unaffiliated shares wish to accept our offer. According to our latest tally, approximately 27% of the unaffiliated shares have not yet been voted. The presumption that these shares should be treated as if they had voted against the transaction is patently unfair.

We believe that $13.75 per share is a full and fair price. We also believe that the decision of whether to accept this offer should rest in the hands of the unaffiliated shareholders. The will of the majority of the unaffiliated shares voting on the transaction should not be thwarted by an unfair standard that counts unaffiliated shares not voting as “no” votes. We believe that the vote of the majority of the unaffiliated shares voting on the transaction should be respected, and that if this majority wishes to accept our offer, it is only fair to permit them to do so.

In our proposal to the special committee, we also left it open for them to decide whether to change the record date. We believe a change in the record date is essential as it would give shareholders time to process and vote on our new proposal.